Many have tried day trading, and an overwhelming majority have failed. However, for every 99 that fails miserably at day trading, there is always that one success story. So what do these successful day traders have that the overwhelming majority of day traders don’t? It’s not access to capital. Rather, it is a set of character traits that allows them to stand tall against the volatile and stressful world of day trading. I have talked to many day traders and have done quite a bit of research on them—and I have managed to come up with six character traits that all day traders have in common. If you are interested in reading what makes a successful day trader, read below.
Day traders don’t trade on “hunches.” They trade on hard data. Successful day traders use the data to develop a set of rules they trade by. They set guidelines for how much of their portfolio to risk, how much they are willing to lose on each trade, and at what point they will take a profit. In addition, day traders develop extremely technical rules for reading technical indicators—because day trading is all about technical indicators. The successful day trader will develop rules and be disciplined enough to follow the rules on each and every trade.
Willingness to Take Risks
Day traders are risk takers, there is no doubt about that. But just because they are risk takers does not mean they are careless or hapless. Rather, successful day traders take calculated risks in which the odds are in their favor. Remember the old adage, “without risk, there is no reward.” Stock investing is an inherently risky venture, but day trading amplifies the risk—by a lot. So those who want to get into day trading should be willing to take risks, and bear the consequences of those risks if the trade doesn’t work out.
Like any other skill or job, day trading takes time to become good at. Many day traders will lose money at first, and many will just give up at the first sight of capital loss. However, the good day traders will keep going and learn from each and every trade, to eventually turn a profit. Losses are part of the game. What is important is that you use the losses as a learning experience and develop a set guideline for yourself for your day trading venture.
Ability to Manage Stress
Anytime there is a good chance to lose money, there is stress. So day traders are faced with stress every day that the markets are open. Being able to manage stress and not let it affect your trading strategy is extremely paramount to being profitable as a day trader. Many traders have pointed to meditation as an excellent stress management tool for their hectic lives.
Ability to Manage Emotions
Successful day traders operate on a certain set of rules that are guided by numbers and math. As such, they have to be willing to part with their emotions. No matter how much they like or dislike a company, they have to be willing to separate their trading strategy from how they feel about the company. Successful day traders, do not worry so much about a company’s bottom line or a company’s fundamentals as they worry about the day-to-day technical indicators of a company. As such, they have to be willing to buy an unprofitable company on an upswing and sell an extremely profitable company on the downswing.
In the book Hour Between Dog and Wolf, trader-turned-scientist John Coates talked about two dangerous but opposing emotions that can ruin a trader. The two emotions are irrational confidence and irrational self-doubt. On one end, traders who have been consistently profitable and on a roll will start to invariably feel invincible. As such, they begin to take too much risk and risk too much of their capital, thinking that there is no way they can lose. These risky positions that they take are outside of their trading guidelines and parameters; these are positions that they would otherwise not take if not for their irrational exuberance. This invariably leads to huge losses and sometimes, a complete loss of capital.
On the other end of the spectrum are traders who have had too many losing trades and thus begin to doubt their every action. Once they have lost too much money, their ego deflates and they begin to question every trade. In this case, a trader doubting themselves will not execute a trade that they would normally execute under normal circumstances. This invariably leads to loss of profits.
Both irrational confidence and irrational self-doubt happens to every trader. But the successful day traders learn from their experiences and don’t let their successes and failures shake them as much. And this takes a lot of emotional mastery.
Day traders have to be willing to make decisions at a moment’s notice. The delay in making a sell or buy order can mean thousands in loss profits. So the ability to decide at a whim’s notice is one of the most important characteristics of day traders.
Although it is totally possible to make money as a day trader, the vast majority who try day trading do not make a profit. And success as a day trader has a little to do with capital availability, but it has a lot to do with character traits. If you do not have the above character traits but want to become a day trader, it is paramount that you develop them. If you don’t have them, you won’t find long-term success as a day trader.